How to Trade Data-Driven Market Movements in Forex Trading?

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In the forex market, many fluctuations are triggered by news, making the technique of trading news-driven markets highly valuable. If you’ve been exposed to forex for more than a week, you’ll be amazed at the tremendous impact data and events have on the forex market, often causing movements of 50 to 100 points within half an hour.

When you witness such situations, I bet you’re thinking about how to pocket that money. Instead of waiting all day, it’s better to seize that half-hour. Of course, where there are more people, there’s less money; where it’s lively, there are more onlookers and fewer experts.

Therefore, we need to find specialized methods to trade these unique market conditions. The path to success depends on choosing the right method.

I. News Trading

We will point you in the right direction and explain the market risks contained in each event. We want to help you grow into an excellent forex trader, and this entirely depends on your effort.

1. Reasons for Trading News-Driven Markets

Trading during the release of economic data is particularly exciting. If you can master it and are willing, you can trade these types of markets exclusively. The release of economic data often triggers intense short-term currency fluctuations, which is tantalizing for all traders.

Of course, traders from larger investment institutions are not allowed to participate in these markets, or if allowed, they are required to strictly control their positions. As a 24-hour and global market, the forex market has many news releases every day.

2. Timing of Important Data Releases

For more accurate times, I believe everyone can find them on major forex websites. We often use DailyFX’s economic calendar to observe the timing of important data releases.

II. Tradable Data Reports

For the currencies we’ve selected, there are 5 to 10 extremely important data releases, and the exact timing of these releases can be known in advance.

We mainly focus on data releases from the United States, as it is the largest economy, and the exchange rates we trade are pegged to the dollar. U.S. data undoubtedly has a significant impact on the entire forex market. Below is a list of some influential U.S. data:

(1) Employment growth data, mainly looking at non-farm employment data;

(2) Interest rate decisions;

(3) Trade surplus and current account;

(4) Gross domestic product;

(5) Retail sales;

(6) Durable goods orders;

(7) Consumer Price Index and Producer Price Index;

(8) Consumer Confidence Index;

(9) Housing starts.

Every country has a list of important data similar to the one above, and we can find this specific news online.

Now we need to know the specific timing and methods for trading data-driven markets. Here are some basic concepts and suggestions:

(1) Although the actual value of the data is related to the long-term trend of the exchange rate, the difference between the market’s expected value and the actual value in the short term is the main reason for the intense fluctuations in the exchange rate. This means that if the market’s expected value matches the actual value released, there will be no impact on the market.

(2) The quieter the market is before the data is released, the greater the market fluctuation will be after the data is released. This phenomenon can be explained as follows: In a quiet market, only a very few traders are buying and selling, possibly waiting for some market catalyst, so they dare not act rashly. When the catalyst is sprinkled on the market, all the waiting traders will rush in, leading to significant price changes.

(3) The duration of the market movement varies depending on the importance of the data and the degree of difference between the actual and forecast values. Therefore, trading data-driven markets are very suitable for scalpers and intraday traders.

III. Trade Within Your Risk Tolerance

Before we spend any money, we always ask ourselves what we will get in return. For trading, we also need to consider the reasonable relationship between payment and return.

We need to consider our capacity before considering the object of purchase; an unbearable burden will inevitably lead to premature death or disability.

Therefore, before trading data-driven markets, please make sure you understand the risks you can bear and the risks brought by data-driven markets.

1. Slippage

The market fluctuates extremely during the release of data, meaning that prices may fluctuate violently in a short time, so when you click the trade button, the price may have already changed. Even the largest brokers cannot completely avoid slippage during the release of data like Non-Farm Payrolls.

Of course, this is also the time to test the stability of the trading platform and the strength of the broker. Therefore, when trading data-driven markets, you need to consider the existence of such risks, ensure that stop-loss orders are placed, and prepare for the worst-case scenario.

For example, once I placed an order on EUR/USD 15 minutes before important data was released. Before the data was published, the exchange rate for EUR/USD was at 1.2320. I placed a long order at 1.2360 and a take-profit order at 1.2383. The data release indicated unfavorable conditions for the dollar. This caused the market to surge 80 points in an instant when the news was released.

My long order was triggered, but unfortunately, my trade was executed at 1.2390, 30 points higher than my limit order. After the market stabilized, my take-profit order was triggered, and I ended up losing money on this trade. This is the trading slippage caused by significant market movements.

2. Order Function Freeze

Some forex brokers freeze the establishment of limit and market orders before the release of major data, usually about 30 minutes to an hour before the news release. These forex brokers are typically institutions that offer fixed spreads.

The reason these brokers’ platforms lock order functions is not that the platform cannot run stably in volatile markets, but rather because the bid-ask spread in the market is generally larger than usual during volatile markets. If brokers provide their fixed spread services, they will incur losses.

3. Severe Fluctuations

During the release of major data, the market can fluctuate 20 to 50 points within a second. The risk associated with data-driven markets is very high. Even for traders with more experience, surfing in data-driven markets is dangerous.

You might have caught the tail of the market tiger, but just like other times, this fierce tiger is likely to turn around and deal with you immediately. In data-driven markets, it’s often the case that one second you’re profiting, and the next second you start losing money.

The forex market is truly ingenious, just like Forrest Gump’s mother told him: “Life is like a box of chocolates, you never know what you’re going to get.” But that’s the interesting part of the forex market.

4. Widening Spreads

Some brokers may guarantee the execution of your orders, but they cannot guarantee that the spread will remain the same.

Therefore, in the case of variable spreads, you will find that the spread on the platform becomes exaggeratedly large when news data is released. I have seen a currency pair with a usual spread of 3 points widen to 14 points during a report release.

If you only want to make a dozen points in data-driven markets, this is undoubtedly a very unfavorable situation for you.

IV. Basic Trading Methods for Data-Driven Markets

1. Straddle Trading Method

Straddle trading is very easy to execute, requiring little thought, but it may be the riskiest type of trading. The straddle trading method involves placing orders on both sides, going long above a price level before a breakout, and short below it.

This method assumes that market breakouts are always genuine. Specifically, before the data release, place a buy order 5 points above a key level above the current price, which is the nearest resistance level to the current price, and simultaneously place a sell order 5 points below the nearest support level below the current price.

Of course, these orders must have stop-losses set to prevent the worst-case scenario. This trading method sounds simple, but if both orders are triggered, it will lead to losses. Therefore, the key part of this method also involves correctly setting entry and exit orders.

Exit orders include stop-loss and take-profit orders. Therefore, the application of this method also needs to be analyzed in conjunction with the specific type of data-driven market.

For example, straddle trading during the release of a single important data, straddle trading during the release of two or more important data, and straddle trading during data release plus official speeches.

2. Data Value Trading Method

This method sounds very attractive to those in need. Because you decide whether a piece of data has trading value, this method is much less risky than the straddle trading method.

First, you must judge the importance of the data report about to be released.

Not every published data is worth trading, either because the data itself has little impact on the market or because the impact is too crazy for us. Always ask yourself how the recent market environment is.

In other words, understand what factors are driving the market recently. For example, perhaps the Federal Reserve is very concerned about inflation issues recently. In this case, any data related to inflation will receive high attention from the Federal Reserve, such as the Consumer Price Index and Producer Price Index, so these data will affect the future direction of the Federal Reserve’s monetary policy.

So, we should pay attention to what the Federal Reserve is concerned about. There is a fundamental factor driving the market for a period, which is what we call the “market focus.” If you can find the market focus and use your fundamental analysis methods to grasp the key driving factors of the market, combined with technical analysis to judge market group behavior, then you will be invincible.

Fundamental analysis involves driving factor analysis, and technical analysis involves group behavior analysis, combining the two, you will be unbeatable! Any data report related to the market focus is the biggest trading opportunity, but the premise is that you must be fully aware of the risks involved.

Second, observe the data release, and see if the actual value released matches the market’s expected value.

These expected values will be given on major financial websites before the data is published. If there is a significant difference between the data value and the forecast value, and the market movement before the data release has not reflected or fully reflected this change, then the market will make a big move after the data is released.

The initiation and movement of data-driven markets depend on the relationship between three factors: actual value, forecast value, and the degree of pre-digestion. The actual value equals the forecast value plus the degree of pre-digestion.

Assuming the degree of pre-digestion is zero, meaning the market has not shown a change in the same direction as the actual value before the data release, then the market’s movement will depend on the difference between the actual value and the forecast value; if the forecast value and the actual value are the same, then the market movement after the data release will depend on the degree of pre-digestion.

Therefore, determining the market’s direction of movement after the data release largely depends not only on the difference between the actual value and the expected value but also on whether the market has already moved and digested the data in advance.

If it has been over-digested, the market will move in the opposite direction after the data comes out; if it has not been fully digested, then after the data comes out, the market will continue to move.

For example, if the US employment report is about to be released and the market expects an increase of 200,000 jobs, the report shows an increase of 300,000 jobs. If the US dollar has not risen before this, or even has fallen for a while, then the market has not pre-absorbed this news, and the actual value is better than the forecast value, so the US dollar will rise to realize the value of this data.

V. Conclusion

After hearing our introduction to trading data-driven markets, do you think that trading these special market conditions requires specialized techniques, as traditional technical analysis may have significant limitations in practical application? We need to develop specialized methods that can handle these types of markets based on their characteristics.

Additionally, trading data-driven markets requires you to effectively categorize data and data-driven markets. This categorization is to grasp the individual characteristics of the market movements, thereby making targeted trading strategies.

Of course, each type of data-driven market needs to develop a specialized trading framework for reasonable risk-reward ratio control. Therefore, you must summarize extensively when trading various specific data-driven markets.

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